Can A Former Co-Founder Use Company IP In Their New Business?

When a founder leaves a business, it doesn’t necessarily need to be some dramatic exit surrounded by complex legal paperwork. If you’ve done the legal work beforehand, everyone should have a reasonably clear idea of what belongs to the business, what happens when someone leaves and where the boundaries are afterwards.

Sometimes, however, those boundaries can get blurred.

A co-founder leaves for a new venture, everyone wishes them the best of luck and a few months later, you notice something in their new business that feels strikingly familiar. Maybe it’s software they helped build, a design, written material or another asset your company has been using for years.

Can they simply take it because they helped create it?

Usually, the first question isn’t whether they were involved in creating the IP. It’s who actually owns it.

What Actually Counts As IP?

A business can build up a lot of valuable assets over time, but they don’t all have the same legal protection.

Intellectual property can include things such as trade marks, software code, website content, graphics, product designs, inventions and other original works. Different types of IP are protected differently. Trade marks, patents and designs have their own registration systems, while copyright generally arises automatically in eligible original works such as writing, artwork and software code.

Then there are valuable things that may not neatly fall within a registered IP right or copyright, such as pricing models, internal systems, customer information, product plans and commercial strategies. Depending on the circumstances, these may instead be protected as confidential information or trade secrets.

This distinction matters when a founder leaves.

A company doesn’t automatically own everything a founder knows simply because they learned it while building the business. Their general skills, experience and industry knowledge are different from taking company-owned code, copying protected materials or using confidential business information.

Before asking whether a former founder is allowed to use something, you therefore need to work out what the asset actually is and what legal rights protect it.

Who Actually Owns The IP A Founder Creates?

This can be more complicated than it sounds.

Being a "founder" doesn’t itself determine who owns something. A founder might also be a shareholder, director, employee or contractor - sometimes several of those at once.

For copyright, the general starting point under the Copyright Act 1968 (Cth) is that the author of an eligible original work owns the copyright. However, there are exceptions. For example, where certain copyright works are created in the course of employment under a contract of service, the employer will generally own the copyright, subject to the particular circumstances and any agreement modifying the position.

Contractors can be different. Paying somebody to create something for your business does not necessarily mean your business automatically owns all of the resulting IP. IP Australia recommends clearly documenting ownership where employees or contractors create IP for a business.

The same issue can arise with founders.

If one founder personally developed the original software before their role was properly documented, another created the branding and someone else registered a trade mark in their own name, the fact that the company has been using those assets does not, by itself, answer every ownership question.

IP can also have more than one owner. Where several founders contributed to the development of an asset, joint ownership issues may arise depending on the type of IP and how it was created. IP Australia specifically notes that IP can have multiple owners.

This is why getting ownership onto paper matters.

A tailored IP Assignment Deed can be used to transfer relevant IP rights to the company. For copyright specifically, an assignment must be in writing and signed by or on behalf of the person assigning it to be effective.

Your Shareholders Agreement, employment agreements and contractor agreements can also help make it clear how IP created for the business will be treated.

The important thing is not to assume that "we all built it together" means the company automatically owns everything.

What If The Founder Created It Before The Company Existed?

This is particularly common with startups.

Two founders might spend months building a product before they ever incorporate a company. One develops the prototype, another writes the code and together they create the brand.

Eventually, they register a company and start running the business through it.

The problem is that incorporating the company does not automatically transfer everything the founders created beforehand into the new entity.

The company may not have existed when those assets were created, so you need to look at who originally owned them and whether those rights were subsequently transferred.

An IP Assignment Deed can help formalise that transfer so the company owns the relevant IP rather than simply using something still owned by an individual founder. Sprintlaw's IP Assignment Deed service is specifically designed to document the transfer of IP rights to a business.

This can become important long before anyone has a falling out.

If the company later brings in investors or is sold, a buyer or investor may want to know that the company actually owns the software, brand, technology or other assets its value depends on. An unresolved question about who owns a founder-created asset can quickly become something that needs to be untangled during due diligence.

Can A Former Founder Use The Same IP In A New Business?

If the relevant IP belongs to the company, generally, a former founder cannot simply take or reuse it without permission just because they helped create it.

Helping build an asset does not necessarily mean that particular individual still owns it.

However, there are some important qualifications.

First, the company needs to actually own the relevant rights. If ownership was never properly transferred, the former founder may still own some or all of the IP, there may be joint ownership, or the company may only have a licence to use it.

Second, you need to identify what the former founder has actually used.

Taking company-owned source code is very different from using the programming skills someone developed while working there. Copying protected graphics is different from creating a new design based around the same general business idea. A person can also independently create something after leaving that happens to compete with their old company.

There may also be a licence or another agreement allowing them to continue using particular material.

So, while "I created it originally" does not automatically give a former founder the right to take company-owned IP with them, something looking similar does not automatically mean the company's IP has been misused either.

The ownership documents, the type of IP and exactly what has been reused all matter.

What About Confidential Information And Business Know-How?

Not every valuable piece of information a founder takes with them will be an IP ownership issue.

A departing founder might know your pricing, customer information, product roadmap, internal systems, supplier arrangements, technical processes or plans that have never been made public.

Confidential information and trade secrets can have legal protection even where there is no registered IP right. IP Australia notes that trade secrets are not registered and that common law, secrecy measures and confidentiality agreements can all be relevant to their protection.

Contracts can make those boundaries much clearer.

A Non-Disclosure Agreement or confidentiality clauses within shareholder, employment or contractor agreements can set out what information needs to remain confidential and how it can be used.

This is particularly useful with founders because they often have access to almost everything happening inside the business.

At the same time, there is an important difference between confidential company information and somebody's own general knowledge and experience. A founder does not necessarily need to forget everything they learned about an industry simply because they leave the business.

That is why properly identifying and protecting genuinely confidential information matters.

What If The Co-Founder Was Also A Director?

For incorporated businesses, a co-founder is often also a company director.

That can introduce another layer of legal obligations.

Under section 181 of the Corporations Act 2001 (Cth), directors and other officers must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. Section 182 also prohibits directors, officers and employees from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.

This can become relevant if a founder begins using their position inside one company to benefit another venture while they are still involved.

There is also section 183, which deals specifically with information obtained because someone is, or has been, a director, officer or employee. That information must not be improperly used to gain an advantage or cause detriment to the company.

Importantly, the Act expressly states that this duty can continue after the person stops being an officer or employee.

That does not mean a former director is automatically prevented from starting another business or competing with their former company. It does mean, however, that how they obtained and use company information can still matter after they leave.

Contractual obligations, including confidentiality provisions or any enforceable restraints that apply in the circumstances, may also need to be considered separately.

Sort Out The Ownership Before You Need To Rely On It

Ideally, your business should not first be working out who owns its most important assets after a co-founder has already left.

Founder-created IP should be identified early, and where the intention is for the company to own it, the transfer should be properly documented.

Your employment and contractor agreements should also deal clearly with IP created for the business. Confidential information should be properly protected, and your Shareholders Agreement can help set expectations around founder departures and the ongoing relationship between shareholders.

When a founder does leave, it can also be worth checking that any outstanding IP ownership issues have been addressed, company material and system access have been dealt with, and everyone understands any obligations that continue afterwards.

There can be plenty of other legal issues involved in a founder exit, from shares to director resignations and handovers. We cover those more broadly in our article on what happens when a co-founder leaves a startup.

For IP, however, the main lesson is simple: don't rely on assumptions about who owns what.

The paperwork is much easier to sort out while everyone is still building the business together than after someone has left and launched the next one.

Need Help Protecting Your Company's IP?

If you're building a business with co-founders, it’s worth making sure everyone is clear on who owns the IP and what happens to it if somebody eventually leaves.

Sprintlaw can help with IP Assignment Deeds, Shareholders Agreements, confidentiality documents and other legal protections tailored to your business.

If you would like a consultation on protecting your company's IP, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.